Harper Company began operations at the beginning of 2021. The following information pertains to this company. 1. Pretax financial income: 2021 $ 850,000 2022 1,250,000 2023 2,875,000 2. The tax rate enacted for 2021 is 20%. 3. Differences between the 2021 income statement and tax return are listed below: (a) Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $3,000 in 2021, $1,500 in 2022, and $2,000 in 2023. (b) Revenue in 2023 on a construction contract is $800,000 for tax purposes. For financial statement purposes, revenue will amount to $100,000 in 2021, $300,000 in 2022, and the remainder in 2023. This is Harper’s only construction contract during 2021-2023. (c) Depreciation of equipment for financial reporting purposes is calculated using the straight-line method. Harper purchased equipment on January 1, 2022 at a cost of $50,000. The equipment has a life of 5 years and a $5,000 salvage value. Depreciation of the equipment for the tax return will be based on double-declining balance with a life of 4 years. (d) A $12,500 fine paid for violation of EPA laws was deducted in computing pretax financial income in 2022. (e) Rent collected in advance on January 1, 2021, totaled $15,000 for a 3-year period. 4. Taxable income is expected for the next few years. REQUIRED a) Below and on the following page, compute taxable income for 2021, 2022, and 2023. CLEARLY show calculations, label amounts, and indicate final answer. b) Prepare the journal entries on December 31, 2021, 2022, and 2023 related to taxes.
Harper Company began operations at the beginning of 2021. The following information pertains to this
company.
1. Pretax financial income:
2021 $ 850,000
2022 1,250,000
2023 2,875,000
2. The tax rate enacted for 2021 is 20%.
3. Differences between the 2021 income statement and tax return are listed below:
(a) Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $3,000 in
2021, $1,500 in 2022, and $2,000 in 2023.
(b) Revenue in 2023 on a construction contract is $800,000 for tax purposes. For financial
statement purposes, revenue will amount to $100,000 in 2021, $300,000 in 2022, and the
remainder in 2023. This is Harper’s only construction contract during 2021-2023.
(c) Depreciation of equipment for financial reporting purposes is calculated using the straight-line
method. Harper purchased equipment on January 1, 2022 at a cost of $50,000. The equipment
has a life of 5 years and a $5,000 salvage value. Depreciation of the equipment for the tax
return will be based on double-declining balance with a life of 4 years.
(d) A $12,500 fine paid for violation of EPA laws was deducted in computing pretax financial
income in 2022.
(e) Rent collected in advance on January 1, 2021, totaled $15,000 for a 3-year period.
4. Taxable income is expected for the next few years.
REQUIRED
a) Below and on the following page, compute taxable income for 2021, 2022, and 2023. CLEARLY show
calculations, label amounts, and indicate final answer.
b) Prepare the
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